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Piketty Day Notes

I’m going to be commenting on Thomas Piketty later today, and I thought I would write up my thoughts in advance; this may or may not be what I actually end up saying.

There’s obviously a lot to be said about the substance of Piketty’s book, and there will be many more research papers inspired by his work. What I want to do, however, is go somewhat meta, and talk about
how Piketty fits into the ongoing debate over the nature and implications of rising inequality — and why “Capital in the Twenty-First Century” is having such a big impact.

So here’s my diagnosis of why “Capital” is so big: Piketty offers the latest and most damning in what have been a series of “Oh, yeah? Guess what” moments.

In the first stage of the debate over inequality, there was widespread denial that rising inequality was even happening on any major scale. Actually, there still is — in this debate, in which one side is sustained
by vast amounts of money and influence with an interest in obfuscation, refuted arguments are never abandoned; they just keep coming back. No point is ever conceded by the apologists. But it was nonetheless true
that by sometime in the early 90s you could mostly say, “Oh, yeah? Guess what.” The evidence for a sharp rise in inequality, a definitive break with the three postwar decades, was overwhelming.

For a long time thereafter, however, the apologists had a fallback position: OK, maybe inequality was rising, but it wasn’t the rich versus everyone else — it was the whole top quintile, basically well-educated
Americans, on the relative rise. So it nothing like the kind of class divisions of the past. The truth is that we knew better than that even by the late 1980, but even a few years ago you still found the voices
of respectable opinion insisting that inequality was about the 20 percent, not the one percent.

But at a certain point — to a large extent thanks to Piketty and Emmanuel Saez — we got to say “Oh, yeah? Guess what.” Actually, rising inequality was in large part about the rise of a tiny
elite, the one percent and within that the 0.1 percent.

Oh, and to those who admitted some rise in inequality but declared that it was nothing like the Gilded Age, the answer was, “Oh, yeah? Guess what.” We don’t have Gilded Age survey data, but we do
have tax records back to the early 20th century, and top income shares are right back at late-Gilded-Age levels.

This brings us to the latest fallback position of inequality’s apologists, one that has lately been associated in particular with Greg Mankiw — namely, that maybe the one percent have been thriving, but
they earned it. After all, we’re talking about self-made men here, not heirs to inherited wealth, right?

Now, this is actually a very weak argument on multiple levels. Although the apologists love to talk about movie actors and sports stars, the highest incomes in America overwhelmingly go to executives, whose contributions
to the economy are largely in the eyes of the beholder. And anyway, marginal product isn’t moral justification; even if you believe that, say, Sandy Weill was so much better than the next best alternative
that his earnings reflected his true contribution to GDP, that says nothing about whether it was fair or just for him to keep so much more of those earnings than he would have been able to if 1960s tax rates were
still in effect.

But in any case, the presumption here is that modern wealth is self-made, nothing like the inherited fortunes of ol. And you know the reply: “Oh, yeah? Guess what.” What Piketty shows is that inherited
wealth has been making a comeback, that it’s already a much bigger factor than most people even on the left realize, and that it’s on track to become much larger still.

And this really is a revelation. Piketty’s literary sources are Jane Austen and Balzac; our modern conceptions, even among liberals worried by rising inequality, tend to be shaped by the likes of Oliver Stone.
Yet it turns out that Gordon Gekko is an increasingly outmoded archetype. Yes, he’s a predator — but he’s very much a self-made predator. And while those people still exist, the economic elite
is increasingly made up of their sons and daughters. As I’ve noted, six of the ten wealthiest Americans, according to Forbes, are Walton and Koch heirs; further down the list are a lot of old men, who will
soon be passing their wealth on.

This brings me to my second point about Piketty, which is that his work greatly reinforces the notion that we may face a political-economy spiral of inequality, in which great wealth brings great power, which is used
to reinforce the concentration of wealth. That was a concern even when we thought we were facing a one-generation dispersion of economic success. But it becomes much more of a concern when one realizes that we’re
talking about creating an environment favorable to “patrimonial capitalism”, of sustained dominance by family dynasties.

And let me say that while the core of Piketty’s work is his economic analysis, his discussion of the political economy of dynastic wealth is a major additional highlight. I was especially struck by the somewhat
paradoxical contrast between Belle Epoque France and Gilded Age America: a notionally egalitarian society in which anything that might challenge the privileges of inherited wealth was beyond the pale, versus a society
that celebrated financial success but in which it was considered reasonable and respectable to advocate high taxation for the explicit purpose of reducing inequality. It seems to me that we want some real scholarship
— from political scientists, not (or not just) economists — to figure out that contrast, and learn lessons that might help us break the cycle of rising dynastic power we face today.

OK, that’s my meta analysis of why Piketty has made such a splash. But let me conclude by saying something about why I was so bowled over by this book. Obviously I share the widespread sense that we’re
learning something very important about the past and future of inequality. But there’s something else: this analysis isn’t just important, it’s beautiful. Piketty gives us something we didn’t
know we needed — a sweeping, elegant integration of growth theory, the factor distribution of income, and the personal distribution of income and wealth. He even (in work linked to but not presented in the
book) shows how to derive the power laws that we know govern the distribution of income and wealth at the top, and shows how r-g determines the crucial exponents.

And my admiration is only reinforced by my sheer, green-eyed professional jealousy. What a book!